2014 performance review

With 2014 behind us, it is of course time for the obligatory year-end portfolio performance review. While one year is a too short time frame (for most strategies) to determine with any amount of certainty if you are able to beat the market it is still better than nothing. Trying to track if you are able to add alpha is hugely important since it determines what the appropriate investment strategy is. Given the low base rate of people being able to add alpha you should be skeptical that someone, who is outperforming, is skilled instead lucky, and that includes yourself. I’m slowly but surely building a decent track record, but with the benchmark up in the double digits for the third year in a row it is relatively easy to look like a genius:

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014 27.71% 18.61% 9.10%
Cumulative 131.66% 59.34% 72.33%
CAGR 32.32% 16.80% 15.52%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

While my results for 2014 are absolutely more that satisfactory, I did in fact, underperform global equities in the second half of the year. I returned just 3.8% in the second half of 2014 while the benchmark returned a whopping 11.0%. The fact that I managed to generate a positive return in the second half of the year is a small miracle in itself, and mostly the result of favorable currency movements. The strong benchmark performance has the same underlying reason since the MSCI ACWI is up just 4.16% for the year when measured in US dollars.

Conduril was (and is) my biggest position with an almost 30% portfolio allocation at the start of July. Unfortunately, it gave away a large part of the gain that it made earlier this year when it dropped 28% from €85/share to €61/share. That’s a pretty strong tailwind to overcome! At the same time, Awilco dropped from more than $25/share to less than $11/share. Other losers in the second half included Conrad, Argo, Deswell Industries, Clear Leisure and Burelle. As a result, my performance attribution graph looks totally different compared to six months ago:

Performance attribution 2014

When looking at this graph you have to realize that it isn’t adjusted for position size. While I made the largest amount of money on Conduril the stock actually underperformed my portfolio slightly. What I find encouraging is that I made money on a lot of different ideas. This contrasts with the first half of 2014 when almost all my gains could be attributed to Conduril.

The more independent bets you make the easier it becomes to discriminate between luck and skill. Unfortunately, stocks are never totally uncorrelated, and I think you can make a decent case that my portfolio is mostly long low liquidity and short high liquidity. So perhaps I’m at risk of large losses in certain market conditions and are the above average returns, thus far, just a fair compensation for this risk. I don’t think that that is true, but given the randomness and uncertainty inherent in investing it is not an easy statement to disprove (if possible at all).

I think that my portfolio is currently well positioned for adverse market scenario’s given the reasonable diversification across countries, industries, and companies. My portfolio is at the moment pretty conservative (too conservative) with a long exposure of just 85.7% and a short exposure of 2.7% for a net long exposure of 83.0%. This is however mostly the result of my recent Conduril sale, and I intend to move closer to being fully invested when possible. Unlike many other value investors, I don’t like holding cash given the associated opportunity cost.

Portfolio composition start 2015

While I probably should add some reflection in this post on what my biggest mistakes were in 2014 I’m not going to do that – it’s getting long enough as it is – but I’m going to discuss why I think my investment in Awilco wasn’t a mistake nor not selling it when it was trading above $25/share. I have seen various people mention this as one of their biggest mistakes of 2014, but I think that is mostly results oriented thinking. Oil suddenly dropping from $100/barrel to almost $50/barrel was a low probability event that I don’t think anyone could have forecast.

Every single stock can be hit by an unfavorable event, and some are more at risk than others. Dropping oil prices were always a possibility, just like rising oil prices. Who knows what could have happened in an alternative world that would have resulted in oil shortages? What would have been a mistake if I would have sized my position in Awilco such that nothing could go wrong. I also don’t think that not selling at $25/share was a mistake. I thought it was roughly fairly valued at that level, and I actually sold some shares but holding a fairly valued stock is in my opinion not a mistake. You will incur transaction costs when you sell, you might be liable for taxes and you get cash in return that earns nothing if you don’t have a good idea on standby. Not selling a clearly overvalued stock: that’s what I call a mistake.


Long everything in the portfolio overview

8 thoughts on “2014 performance review

  1. Martin

    Congrats, your performance looks great. I have used S&P500 TR in € as personal benchmark, which was very challenging.
    Just some random thoughts:
    -After argo group, there seems to be one colour wrong in the piechart.
    – Imho no value investor likes holding cash. They just prefer cash to non-conviction ideas, as it has some optionality. Some also have to hold cash due to time-horizon of their source of funds (investor’s, insurance float’s, etc.)
    – I don’t believe outperformance is the same as alpha. One has to adjust for risk, although I don’t know how. Some models use volatility=risk. How do you do this? You mention liquidity.
    – You actually earned money on Awilco. This is great for a oil-related idea.

    1. Alpha Vulture Post author

      * I use the MSCI ACWI because I would probably put the largest amount of my money in an ETF that would track that benchmark – or a similar benchmark – if I would not try to make any active investment decisions. I would certainly not put everything in the S&P500, so I don’t think it’s an appropriate benchmark for me.
      * The colors are right, but deleted a couple of names from the chart for various reasons.
      * I think that there is a large group that thinks that you need to have cash unless there is massive blood in the streets. They don’t see being fully invested as the norm.
      * I agree outperformance is not the same as alpha. Adjusting for risk is very hard though since an rigorous (academic) approach would not only require us to control for volatility (beta) but also size and momentum (and possibly liquidity). And you have issues with stale pricing with illiquid stocks which makes it hard to observe the underlying volatility. As a retail investor I don’t have the tools to acquire the right data. And even if you could do that you still have a discussion whether or not a low P/B ratio is truly a risk factor instead of a source of alpha. I think in the end you just need to outperform by such a wide margin that you don’t need fancy math, or just accept that you will never be able to know if you add alpha.
      * Mostly luck (and a couple of big dividends that cushioned the price drop).

  2. Jay

    Nice performance in 2014!

    I agree with you on Awilco. I held (i.e. didn’t sell) when it was $25 a share and actually added more when it got down around $10. With the two rigs under contract for at least another 12 months it is too early to tell what the environment will be when they come on the market again. The situation reminds me of a very junior soccer game where ALL the players follow the ball instead of playing their positions; the kids have an excuse in their age while investors should know better (but apparently don’t). It appears to me that little potential upside is priced into Awilco at present just as little potential downside was priced into the stock last June. What really matters is where day rates end up in 1 to 2 years not what today’s perception is of where they will be.

    1. Alpha Vulture Post author

      I don’t fully agree with your statement. Still plenty of downside for Awilco if their rigs will get cold stacked when the current contracts are finished, and the current oil price is probably a decent estimate of the oil price 1 or 2 years from now. I don’t think I can predict the oil price any better than the market.


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